Top picks: TI, Swisscom, TKA, Liberty Global, Colt, Iliad – Top shorts: TEF, BT, PT, TalkTalk.
With European telco capex up 10% in 2014e and historically high capex/sales of 16%, the hope is
that leaders will improve their competitive position, both in mobile (versus challengers) and in fixed
(versus cable), force smaller players to consolidate, restore pricing power and get back to growth.
Based on 118 company meetings in 24 countries, we see a more balanced outcome.
* M&A well underway, but we take a cautious view on ‘market repair’
The mobile challengers generate sub-par returns and lack FCF. They need more scale so further
consolidation is likely. We estimate total M&A synergies in Europe at EUR60bn of which a third
from already-announced deals, a third from cost synergies and a third from ‘market repair’.
However, the latter part may be too much to hope for, depending on antitrust remedies and on the
presence of cable/fixed operators who see mobile as a mere add-on to the home bundle.
* Superfast broadband: catching-up with cable will require more fibre capex
Cable has a clear upgrade route to 1Gbps broadband, so the current FTTC/VDSL will not suffice.
If they want to be competitive against cable, incumbents face a EUR20-25bn ‘capex gap’.
* Less hopes on Germany – Downgrading DTE and TEF DE to (=)
Assuming that German mobile consolidation is approved, the new market structure may lead to
fixed-mobile competition, putting the future TEF DE in an uneasy mobile-only position. With higher
long term fibre capex, lower M&A option value and in-line multiples, DTE looks less attractive.
* Market repair in Austria and consolidation in Belgium – Upgrading TKA and MOB to (+)
In Austria, mobile prices are rising, from a low base – we expect TKA to return to growth. Belgium
may be the country where Liberty Global could buy a mobile network – in a deal, Mobistar could be
worth EUR22/share. Both TKA and Mobistar remain risky, but we see attractive risk/rewards.